FFIEC Says Examiners Won’t Criticize Prudent Ag Loan Modifications

Lending institutions that serve farmers affected by the 2012 drought are being encouraged by the Federal Financial Institutions Examination Council to work with borrowers to modify loans, ease credit terms and expedite credit decisions.

The FFIEC said in a release Tuesday that it will “support efforts to originate and prudently modify loans” for affected farmers. In exchange for their efforts, lending institutions will receive consideration from examiners regarding the unusual circumstances in affected areas, the FFIEC said.

“Financial institutions that implement prudent loan workout arrangements will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse classification or credit risk grade,” the FFIEC said.

Typically, agricultural credit lines are paid in full after summer and fall harvests, and before farmers borrow money for seed, fuel and other supplies necessary to plant the next year’s crop. However, because the drought has reduced yields significantly, and in some areas, destroyed crops completely, the FFIEC acknowledged that “some agricultural borrowers may need to carry over a portion of operating lines of credit that cannot be retired because of lower crop yields. Financial institutions should perform a comprehensive review of an affected borrower’s financial condition in an effort to implement prudent loan workout arrangements.”

Because the effects of natural disasters on the agricultural sector are often transitory, the council said prudent loan modification efforts can help stabilize borrowers, benefit the long-term interests of financial institutions and their stakeholders, and contribute to the health of local economies. Acceptable solutions suggested by the FFIEC include: